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Source: Times Finance Author: Li Yiwen

After a strong rebound, the RMB exchange rate has "receded" somewhat.

On August 9, the central parity rate of RMB against the US dollar was raised to 7.1449, up 11 basis points, reaching a new high in more than a week. The onshore and offshore RMB against the US dollar also adjusted back. At the close of the day, the onshore market quoted 7.1688, down 65 basis points from the previous trading day, and the offshore quoted 7.1770, down 79 basis points from the previous trading day.

Prior to this, affected by factors such as the unexpectedly weaker U.S. non-farm payrolls data, the weak and declining RMB staged a strong rebound in early August, rising by more than 1,500 points in two trading days. The onshore and offshore markets rose from the 7.3 mark to around 7.1.

At a time when global assets are experiencing a rapid "shrinkage", the rapid recovery of the RMB exchange rate reflects the international market's confidence in the Chinese economy and is also conducive to attracting long-term capital inflows to a certain extent. But on the other hand, the sharp rebound of the RMB has also added new challenges to the already severe export market.

Renegotiate the price of foreign trade orders

The RMB exchange rate rose almost overnight.

Since the beginning of the year, the RMB exchange rate against the US dollar has generally shown a downward trend. The onshore market has continued to fall slightly from 7.0978 at the beginning of the year to 7.2710, a drop of 1,732 basis points. Although there have been many fluctuations in the offshore market, it has also shown an overall downward trend. At the beginning of the year, the offshore RMB exchange rate against the US dollar was still hovering around 7.12. By mid-July, the offshore RMB had fallen below the 7.3 mark.

The turning point occurred on August 2, when the U.S. non-farm payrolls data was released that evening. The U.S. added 114,000 jobs in July and the unemployment rate rose to 4.3%, while economists expected 175,000 and 4.1% respectively. The U.S. labor market was weaker than market expectations, and the outside world speculated that the U.S. economy might enter a recession.

After the data was released, the three major U.S. stock indexes opened sharply lower, and the U.S. dollar index fell sharply, falling by more than 1%. The Japanese yen and the renminbi rose in reverse, and the onshore and offshore markets of the renminbi both broke through the 7.2 mark that day, rising by more than 1,000 basis points.

At present, the strong rebound of the RMB against the US dollar may be coming to an end, but its impact on some foreign traders has just begun.

As one of the world's largest drinking straw manufacturers, Yiwu Shuangtong Daily Necessities Co., Ltd.'s sales director Yu Baocai told Times Finance that due to the thin profit margins of its products, the company's foreign trade department is extremely sensitive to exchange rate changes. The recent "unprecedented" rise of the RMB against the US dollar has made the company extremely nervous. Currently, the company has a dedicated person to closely monitor the changes in the RMB exchange rate, and foreign exchange settlement is also being carried out simultaneously.

Yu Baocai said that since June this year, the number of overseas orders has shown a downward trend, and the order prices have also reached a new high. Coupled with the increase in sea freight prices, the company's product profits have become relatively thin. "The RMB has soared in the short term, which has required many orders to be followed up to renegotiate prices. In order to avoid rapid changes in exchange rates in the future, the company is currently very cautious in controlling order prices, and there is not much room for concessions on many order prices."

In fact, Times Finance has learned from some export companies that since the beginning of the year, due to the overall continuous decline of onshore and offshore RMB, some exporters have cancelled the cumbersome foreign exchange lock. With the rapid recovery of RMB, there are now many companies eager to settle foreign exchange.

"For any country, large short-term exchange rate fluctuations will inevitably lead to exchange rate risks for foreign trade companies and interfere with price negotiations between traders."China Everbright BankZhou Maohua, a macro researcher at the Financial Markets Department, told Times Finance that a too-rapid appreciation of the RMB would indeed have a certain impact on the export competitiveness of some production factors in domestic labor-intensive enterprises, and would also trigger a trend of following suit in foreign exchange settlement.

"However, although the RMB exchange rate against the US dollar has fluctuated greatly recently, the exchange rate against a basket of trade-weighted currencies has fluctuated around 100 and is generally stable. And from an overall perspective, my country's foreign trade structure is relatively complex. Although the appreciation of the RMB will increase the costs of some export companies, it will also reduce the import costs of some foreign trade companies that have raw materials abroad." Zhou Maohua said that overall, this round of RMB appreciation against the US dollar has limited impact on my country's foreign trade.

In fact, the CFETS RMB exchange rate index, which is calculated based on a basket of currencies, is still relatively stable. According to the latest data released by the China Foreign Exchange Trading Center, on August 2, the CFETS RMB exchange rate index was 98.95, down 0.31 from the previous trading day.

Yu Baocai also admitted that although the company attaches great importance to exchange rate fluctuations, the current rapid rise in the RMB exchange rate has not caused any substantial impact on the company's production. "Although this situation is rare, it is not the first time we have encountered it. Many contracts will also consider exchange rate fluctuations in advance and limit the scope of exchange rate fluctuations."

RMB expected to break 7 in the second half of the year

This round of RMB appreciation comes at a time when global assets are shrinking.

On August 5, the first trading day after the release of the US non-farm data, due to concerns about the US economic recession, stock markets in many countries around the world, except for China's A-shares, suffered a "Black Monday". Among them, the Nikkei 225 index fell 12.4% on the day, also setting a record for the largest drop in history. The Dow Jones Index and the S&P 500 Index in the United States both recorded their largest single-day declines since September 2022.

Even the gold market, which is known for its risk aversion, was not spared. On August 5, London gold spot once fell below $2,400 per ounce, and COMEX gold also approached this integer mark. At this time, the steady rise of the RMB exchange rate was particularly eye-catching.

Can RMB assets become a “safe haven” for global funds?

In this regard, Zhou Maohua believes that although the current RMB against the US dollar has fallen, from the perspective of an important factor affecting the RMB trend - the interest rate gap between China and the United States, the interest rate gap has shown a trend of peaking and falling since late April.

"Domestically, China's economy is recovering steadily and prices are maintaining a moderate upward trend, which will constrain the downward space for market interest rates. Overseas, the U.S. economy and inflation are slowing down, and policies are gradually shifting to a cycle of interest rate cuts. It is expected that the interest rate gap between China and the United States will gradually narrow, further weakening the impact of the interest rate gap on the RMB exchange rate," he said.

Zhou Maohua further explained that developed economies are facing economic slowdown, pressure on corporate earnings prospects, geopolitical conflicts, trade protectionism, and risks of the US election. The volatility of overseas markets has increased. In addition, the overall high level of overseas asset stocks has increased the risk relative to the return. However, the domestic economy, policies and corporate earnings prospects are relatively certain, and RMB assets with low valuations are expected to become a "safe haven" for global funds.

However, Tan Yaling, an independent economist at the China Foreign Exchange Investment Research Institute, holds a different opinion. She believes that although the interest rate gap between China and the United States has narrowed and the market generally bets on the Fed to cut interest rates, it does not rule out the possibility that the Fed will still raise interest rates.

Tan Yaling told Times Finance that the latest evidence for the market speculation about the Fed's interest rate cut is the unexpected decline in U.S. non-farm payrolls data. Although the U.S. unemployment rate in July was the highest in nearly three years, if we extend the time period, the data is at a historical low in the past 50 years.

Regarding whether RMB assets can become a "safe haven" for global funds, Tan Yaling believes that the current round of RMB appreciation against the US dollar is more due to technical adjustments after the decline of the US dollar index, rather than being driven by investment. "If (RMB assets) are really regarded as a safe haven by global funds, why is the China A-share index still at a historical low, and the Chinese government bond market has not changed much recently."

In fact, from the perspective of the interest rate gap between China and the United States, as of August 9, China's 10-year Treasury bond yield was 2.19%, and the US 10-year Treasury bond yield was 3.94%. The inverted interest rate gap between China and the United States was 175 basis points, which has shown a significant decline compared with the historical high of 237 basis points in the middle of the year, but is still at a historical high overall.

In addition, since 1980, the U.S. unemployment rate has long been above 4%, with only very few periods of time below 4%.

However, Tan Yaling also said that the current economic trend in China is positive. With the market's expectations of a rate cut by the Federal Reserve and speculation on the global economic outlook, it is not ruled out that the RMB exchange rate against the US dollar will appreciate again in the second half of the year, or even break through the "7" mark.